Room to grow: Legalization means opportunities for pot companies big and small

The annual 420 Toronto 2017 event is held at Yonge Dundas Square one last time in Toronto on April 20, 2017. (Steve Russell/Toronto Star via Getty Images)

When recreational cannabis is legalized in Canada later this year, the country is going to be facing a “welcome problem.”

“We have a unique and welcome problem in this industry,” says Allan Rewak, Acting Executive Director of the Cannabis Canada Association. “We will not have enough cannabis to supply the industry post July.”

In Sept. 2017, Mackie Research Capital Corp. issued a report estimating that Canada would require approximately 795,000 kg of marijuana in order to meet demand in 2018, The Financial Postreports, but estimated the capacity of producers at the end of 2017 to be at about 100,000 kg.

“The amount of invested capacity today and that is expected to be built up for the foreseeable future, that will not catch up to demand for another two years,” says Matei Olaru, CEO of Lift, an online platform that allows for medical marijuana users to share reviews about cannabis products, and educates consumers about their cannabis purchasing options.

“We’re expecting say until 2021, 2020, a healthy two years after July, during which demand will outstrip supply.”

Olaru says that while the apparent “arm’s race” for producers and retailers to lock down supply chains appears to favour big companies like Canopy Growth, Aurora Cannabis and Aphria Inc., the demand will benefit everyone.

“It’s evident that the larger players are being rewarded because they’re the most stable,” says Olaru. “The government is saying they want to secure the largest players because they want to be prepared for this scenario they know nothing about.”

“It’s important to understand that these [large producer agreements] are simply the beginning,” says Rewak.

Just like Canada’s $22.1 billion-alcohol industry, the recreational marijuana market is poised to be made up of larger producers that retailers can turn to for a stable supply of product, and smaller ones that will help cater to a niche, craft range of tastes and lifestyles. With the recreational marijuana market in Canada expected to be worth between $5 billion and $10 billion, there’s a wide array of business opportunities for companies who seek them.

Boutique bud

In February, Ontario held a “supplier prep day” in Toronto, open to all 90 currently-licensed producers from across the country. The event, hosted by the Liquor Control Board of Ontario and its marijuana subsidy the Ontario Cannabis Retail Corp., helped to show that there is space for companies of all sizes in Canada’s upcoming recreational marijuana market.

“The process for procuring cannabis supply for the OCRC will be open to all Canadian licensed producers,” LCBO spokesperson Nicole Laoutaris told The Financial Post. “The OCRC has not yet entered into any supplier agreements.”

While Ontario, as well as Quebec, New Brunswick, Nova Scotia, P.E.I., and Manitoba have opted for government-run liquor control board stores, other provinces including B.C., Newfoundland and Labrador, Alberta and Saskatchewan will sell through private licensed retailers.

The diversity of approaches has meant that startups like Canwe Growers, an Ontario marijuana producer that is in the process of getting their production license, will be able to find retail space for their product. Operated by New Maple Holdings, Canwe applied for a license last July, received their security clearance this past January, and are now in the final stages of the review process.

Co-founder of New Maple Karim Nehme says that smaller companies will be able to stand out against the big players just like in the booze industry.

“If you look at beer, there’s something like 1,500 beer companies, all the larger players and all the craft brews,” says Nehme. “But they all came along, they did something different, and managed to grow.”

“We’re trying to focus on quality, no matter the size of the company,” adds New Maple CEO Tegan Adams. “To set ourselves apart, we’re focusing on the quality of the grow, and the quality of the team.”

New Maple and Canwe are currently in the process of developing their product lines, but part of their strategy will be focusing on lines targeting women, and products that would appeal to a broad female audience as well.

Hiku Brands is also focusing on a niche customer experience, targeting the sophisticated and refined cannabis consumers.

The vertically-integrated Hiku produces its marijuana through DOJA in B.C.’s Okanagan Valley, sells through its Tokyo Smoke stores (and holds one of four retail licenses in Manitoba through that brand), and operates the cannabis digest Van der Pop. Gertner says that offering tailored experiences to consumers is critical in these early days, as dedicated recreational brands and retail experiences begin to evolve.

“Consumers are still searching for information and education, so the in-store experience will be critical in helping teach consumers,” says Gertner.

Supplying the demand

While the dearth of cannabis growing capacity in Canada is good news for the companies trying to find their place in the market, it’s a source of worry for licensed producers who are trying to plan distribution for their limited supply.

“The anxiety is will we have enough capacity to meet demand, not whether we’ll be in the market,” says Mike Gorenstein, CEO President and Chairman of Cronos.

Cronos, which was founded in 2012 ahead of the 2013 medical marijuana legalization in Canada, also grows cannabis in the Okanagan Valley, and operates under several brands, including the medical marijuana brand Peace Naturals. Gorenstein says that his biggest concern is making sure the medical users are taken care of ahead of the recreational ones.

“If there’s a limited amount of building material when you’re building a new community, you should probably build a hospital before you build a bar,” says Gorenstein.

“What I’m very cognizant of is what happens if we overcommit to recreational and suddenly our medical patients don’t have access.”

Gorenstein stresses that the strains produced for the medical market won’t necessarily be the same ones produced for the recreational one, but there’s still a finite amount of space in which to grow plants, regardless of the intended use.

“There are a lot of well-funded producers that have been around since 2013, and they’re not producing that amount today,” he adds. “The idea we’re going to suddenly get to 100,000 kilos is a little farfetched.”

Even with supply issues looming large, producers across the country are eager to be involved in the burgeoning industry.

“This is our chance as a country to define an industry and a social movement that will take off around the world,” says Gertner.

“I’m excited about the chance to be part of that. It’s a once-in-a-lifetime opportunity to change people’s lives.”